The headwinds before China’s startups have shown no sign of abating. The Chinese government has set a growth target of around 5% for this year—equaling last year’s ambition and outcome. But while the target is the same, the conditions for achieving it are markedly different. Domestic economic weakness last year diminished investor and business confidence, while trade pressures that began under the Biden administration have intensified under Donald Trump’s second presidency.

Amid the trade and economic uncertainties, the emergence of DeepSeek is a timely reminder that China remains a vibrant hub for entrepreneurial activity and trailblazing technology-based companies. The DeepSeek frenzy underscores how the Chinese startup ecosystem is responding to a structural transition in the world’s second-largest economy, as it pivots from staid growth engines like housing and construction, toward an accelerator state powered by technology and industrial innovation.

Five years ago new high-potential innovative companies in China were mostly focused on software as a service (SaaS) for specific industries and e-commerce. Today early-stage businesses are increasingly coalescing around deeptech sectors that include AI, blockchain, robotics and biotechnology. Many of these strategic emerging industries are an open playing field as they are not yet dominated by incumbents. They also benefit from the focused policy attention of the Chinese government, which guides the interest of VC financing.

The scale and depth at which China is embracing these cutting-edge technologies to build long-term national competitiveness is creating new opportunities for startups and entrepreneurs, including those from overseas. The undeniable scale of the Chinese market presents unmatched opportunities for businesses seeking to lower costs and increase profits.

“China is a key market, because China is one of the most competitive markets in the world. But for many multinationals, their historic status as global leaders means little in China, where they are under a lot of pressure from local competition within the market,” said William Bao Bean, a venture partner at global VC fund SOSV and managing director of Orbit Startups.

Behind China’s drive to transform itself into an economy centered on techno-industrial innovation is a grassroots landscape full of eager, ambitious startups that play a crucial role. The rapid modernization of China and the growth of its economy over the past three decades has birthed some of the world’s biggest and most innovative companies—many of which began as entrepreneurial startups.

The rise of the mobile Internet since the early 2010s proved to be transformational for China’s huge consumer market. The generations born since the 1980s have become China’s most influential buying group, creating surges in consumption that have brought new business opportunities. With novel ways of thinking and shopping, China’s consumers are looking for more personalized, more convenient and smarter products and services.

This has been reflected in the list of globally significant companies founded in China over the past decade, from Alibaba-affiliated fintech giant Ant Group and TikTok owner ByteDance, to the world’s biggest fashion retailer Shein and social media juggernaut Xiaohongshu.

The success of China’s startup ecosystem has propelled it up global rankings as the best VC destination in the world after the US. Already by 2003, China ranked second in terms of VC financing, according to startup analytics firm Dealroom. That year Chinese early-stage companies received just 12% of the VC investment that flowed into their American peers—by 2017 the ratio had climbed to two-thirds.

More recently though, mounting challenges facing China have cooled the buzz in the startup landscape. The downturn partly reflects the US-China trade war, slowdown in the Chinese economy, the bursting of its property bubble and stagnate domestic equity markets.

The ongoing tit-for-tat tariff conflict between Washington and Beijing is a fresh factor for 2025. The dispute is reshaping China’s startup environment, accelerating local technological adaptation to bolster self-reliance in critical sectors like AI, semiconductors, and green energy, according to Wilson Chow, who heads PwC’s global technology, media and telecommunications (TMT) industry practice and is TMT Industry Leader for PwC China.

“Startups and their investors must now reinvent their business models to mitigate supply chain disruptions and rising operational costs. Many may also expedite plans to diversify production bases and expand into new markets, reducing reliance on single geographies,” said Chow.

“Additionally, these uncertainties may lead to reduced foreign investment in China, prompting startups to depend more on domestic funding sources, leveraging government support and capital markets to secure growth financing.”

Export-oriented manufacturing startups and cross-border e-commerce enterprises have been most exposed to the tariffs and counter-tariffs, which have directly increased export and logistics costs, heightened compliance challenges, and weakened price competitiveness. More generally, Trump’s whiplash trade policy has created uncertainty for startups when formulating long-term strategies and investment plans, especially those looking to expand overseas.

“Investor appetites have been changing because capital markets in both the Chinese mainland and Hong Kong have not been operating aggressively in the past two years—though we see a bit of pickup recently—and also because market valuations have come down quite significantly,” said Chow.

“IPO momentum slowed down quite a bit. There was a lack of options for investors to make good exits, engendering more skepticism or caution in selecting investments.”

The waning enthusiasm is also a direct result of regulatory risks and compliance costs that have become onerous for some entrepreneurs. In the past few years China has introduced a litany of policies to assert more control over its Internet sector. Verticals from fintech, social media and gaming, to e-commerce and livestreaming have increasingly come under regulatory fire for their unscrupulous growth and the social issues they produce, while authorities launched a crackdown on technology companies regarded as monopolistic or not attuned to the needs of the state.

The downbeat mood has been reflected by a pullback in VC financing. China’s venture market nosedived in 2024 as funding slumped by 27% year-on-year to a nine year-low of $38.4 billion, according to Dealroom data. A modest pick-up between the third and fourth quarters lifted sentiment, but financial flows remained down significantly from 2023.

But last year’s venture investment data provides directional insights that indicate areas of optimism for Chinese startups. Manufacturing attracted more than two-thirds of VC funding, the biggest category by far and maintaining a recent high over the past three years. Deeptech—driven by semiconductors, space, AI and robotics, and clean tech—captured a record 38% of financing compared with 10% in 2017, while sectors such as fintech, marketplaces and e-commerce, and consumer tech have faded from the market since 2019.

Deeptech represents the cutting-edge techno-industrial innovation that dovetails with the government’s strategic priorities. “The future belongs to startups that introduce disruptive technology with the potential to align with the capabilities that China wants to strengthen,” said Chow.

Nowhere is this more apparent than the low-altitude economy, which leverages China’s world-class manufacturing capability, strong AI expertise and large-scale domestic market. Referring to commercial flights below a height of 1,000m, the low-altitude economy has been forecast to be worth ¥2 trillion ($277 billion) by the end of this decade, generating significant opportunities for foreign drone startups such as Switzerland’s Flyability.

More encouragement for the startup ecosystem has come from policymakers, who intend to prioritize reviving private-sector confidence this year through concrete measures such as enhancing the legal protections of private enterprises and boosting credit supply to small- and medium-sized enterprises. The support came after President Xi Jinping chaired a private enterprise symposium in mid-February that was attended by high-profile entrepreneurs including the founders of Alibaba, Xiaomi and DeepSeek.

The policy actions will help reassure entrepreneurs of the government’s commitment to supporting the private sector, which contributes more than 50% of tax revenue, 60% of GDP and 70% of technological innovation achievements.

As China’s startup scene looks to ride policy tailwinds, it can draw strength from an increasingly innovative economy too. China ranked 11th on the latest Global Innovation Index maintained by the World Intellectual Property Office, ahead of the likes of France, Japan and Israel. The country is the undisputed frontrunner in a number of future-facing hi-tech industries, from clean energy technologies to electric vehicles.

China’s vast market potential remains appealing for ambitious entrepreneurs but Bean identifies three key trends that foreign startups should keep in mind. The most relevant is that foreign companies and brands no longer automatically have the red carpet rolled out for them, unlike the glory years when they were feted by consumers and local bureaucrats.

“All the benefits that were previously afforded to foreign companies in China are gone. There used to be a lot of advantages that you could get by entering China but it’s now actually a lot harder to enter China than it used to be,” said Bean. As Chinese brands flex their muscles, foreign companies are navigating a more dynamic and intricate business environment where shifting consumer preferences have been accompanied by heightened regulatory scrutiny and greater potential for government intervention.

“A number of barriers were erected in the past three to four years that have not been dismantled in their entirety, making it difficult for foreign companies to enter China and to sell into the market.”

A unique challenge for foreign SaaS startups to navigate is the emerging schism in China’s tech ecosystem with the rest of the world, as geopolitical tensions and strategic priorities drive the country to build its own independent and increasingly walled-off tech infrastructure.

“There is a very clear division between the tech infrastructure required to operate in China, and then tech infrastructure required to operate outside. There are a huge number of local laws in China that need to be followed, such as hosting data. Using China-based hosting and communications infrastructure requires major localization in order to operate effectively, much more than perhaps any other market in the world,” said Bean.

For foreign SaaS startups looking to operationalize in China, the partial disentanglement can be sidestepped by engaging specific partners such as AppInChina, which helps overseas companies localize, host and distribute their software in China.

While foreign investors have gained considerable access to China’s markets over the past decade, they are encountering fresh difficulties that are now keeping some away. Raids at consulting and due diligence companies, and curbs on international access to various corporate and economic databases have undermined the investment case for China and prompted some foreign firms to think twice about committing more resources to the world’s second-largest economy.

“It is very difficult for foreign investors to invest in China and it is very difficult for Chinese investors to invest in foreign companies. On top of this, the investment environment in China is still somewhat negative right now,” said Bean.

These trends, combined with the broader economic and geopolitical dynamics, have prompted a rethink of business models within the startup ecosystem. Many of China’s most successful startups in the past decade, particularly those with roots in the digital economy, focused on business-to-consumer offerings. But China’s bumpy growth has driven a shift toward business-to-business or business-to-government.

The growth slowdown at home and intensifying domestic competition mean Chinese startups must take the initiative in targeting and expanding to international markets. “They need to consider globalization from day one, instead of purely focusing on the domestic market,” said Chow. “We are seeing many startup companies in China put in place plans for expansion or product launches in Southeast Asia, Latin America or Europe. This is somewhat different to how the previous generation of Chinese unicorns operated.”

Unlike businesses of the past, today’s startups are competitive because of their mastery of data and technology. But the accelerating cadence of technological innovation and adoption in China is even forcing startups, the nimblest of companies, to keep up or risk being left behind. DeepSeek is an example, as dozens of companies in China from automakers to brokerages quickly integrated its R1 large language model into their platforms after its release in January.

The pace at which disruptive technology is advancing has underlined the importance of digital readiness for startups, according to Chow. “Operationally, the wholesale shift to digital means even before founding their startup, entrepreneurs need to have a digital strategy in mind when they structure company operations.”

This could take the form of understanding deeply how to digitalize operations, leveraging digital infrastructure to offer products or build connections with target consumers, and utilizing digital technology to analyze consumer behavior and preferences to enhance customization and satisfaction.

As the investment environment shifts away from the high-risk, capital-driven model of the past, startups today must embrace a more pragmatic approach to growth. In this environment, tech-driven companies are now expected to play a greater role in empowering the real economy. Whether focused on soft or hard technologies, businesses must demonstrate genuine technological value. Founders with strong academic backgrounds and research and development expertise—often termed ‘scholar-type’ or ‘expert-type’ entrepreneurs—are increasingly sought after by both investors and the market.

When it comes to AI, space and semiconductors, opportunities for foreign startups may be limited as the government is determined to find strength from within by nurturing an indigenous value chain that can offer self-sufficiency. But other core deeptech sectors offer openings for outsiders, particularly those from Switzerland.

The country is one of the most reputable and innovative biotech hubs in the world, and boasts a world-class life sciences industry. Swiss expertise aligns with the needs of China’s healthcare system, where there is significant demand for innovative pharmaceutical products, therapies and medical devices from an increasingly wealthy, health-conscious and aging population. There is also strong potential for closer collaboration with the fast-growing Chinese biotechnology and biopharmaceutical industries, which have started to innovate with more advanced drugs that can compete directly with Western offerings.

Swiss environmental policy has achieved many successes since the 1980s and helped cultivate a robust environmental industry that leads in carbon capture, wastewater treatment and air quality improvement. A cleaner landscape has major relevance in China, which has committed to greening its economy and zeroing out greenhouse gas emissions before 2060. The goals mesh well with Swiss solutions for decarbonization, which include cutting-edge direct air capture technology developed by Zurich-based Climeworks.

While foreign deeptech startups may be focused on selling into the local market, they would also do well to explore the advantages of China’s unmatched manufacturing capabilities and how it can benefit them, according to Chow. “They should leverage what China has to offer—which is an excellent supply chain with relatively cheap labor, accessibility to raw materials, and established production facilities—to really crystallize their product and solution in the country.”

The VC financing pullback and more challenging economic environment, coupled with deeptech’s traditionally longer time horizons and deeper capital requirements, indicate the days of a quick exit and return on investments may be over. Instead, the mindset is shifting toward a long-term perspective that embraces a willingness to wait for a more extended period, often years, to realize substantial returns.

“I think China is following in the footsteps of mature VC and private equity investment markets in developing this type of patient capital,” said Chow. “Some investors are not looking for immediate returns, or within a very short time span of two to three years. Instead, both investors and businesses are adopting long-term strategies to ensure sustained growth and market competitiveness.”

It is undeniable that the most exciting corners of China’s startup landscape have evolved since the Internet and e-commerce giants of today burst onto the scene in the 2010s. From new media, social platforms, mobile e-commerce, to the sharing economy, there have been multiple success stories in the last decade. In the past, business model innovation alone could drive rapid growth. But with overcapacity and a cooling capital market, the ecosystem for innovative firms is necessarily becoming more rational. At the same time investors have grown more cautious regardless of a sector or technology’s popularity.

The firm focus on deeptech reflects a strategic shift from business model innovation to core technology breakthroughs. As capital-driven strategies become harder to leverage for differentiation, startups that invest in long-term value, technological ingenuity and sustainable business models are best-positioned to stand out and become the next generation of industry leaders.

Article posted on June 26, 2025.